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Thursday, June 9, 2016

Turning Bear Market Into 'Buying Opportunities'

A Bear market is a market condition in which the prices of securities
are falling due to widespread pessimism that causes the negative sentiment.
During this time, many speculators and investors rush to sell their positions
worrying that they will lose their portfolio value. Since there are more seller
than buyer in the market, the pessimism only grows stronger which will
eventually lead to a huge stock decline. Many people were told to stay out of
the market during this time or maybe to sell all their positions in certain
companies (I did this before and I regret it till now). However, you may be
surprise to find out that you don’t need upward trend market to make money in
the stock market. As for me who is a dividend growth and value investor, I tend
to see things with long time horizons and see the bear market condition
differently than most investors out there. You will see many great quality
dividend growth companies trading at cheaper price. As a value investor, I tend
to focus more on the quality of the business rather than the short-term or
near-future share price. You shouldn’t be scared that the stock price has
decline tremendously, in fact you should embrace it. I focus more on the
quality of the business rather than the short-term or near-future share price.
And knowing the quality of business, I use the bear market condition as an
opportunity to purchase great companies. So
what’s the reason behind it!

Cheaper
Valuation

There are many great quality companies that are selling at attractive
price during the bear market. To me, I treat the bear market as if it’s a sales
season when department stores are selling merchandises at huge discounts (I
usually do buy goods when it’s on sales anyways). I will seek for quality
companies that have a history of positive earnings and cash flow. After knowing
that the company seems stable and knowing that they are trading at a bargain
price. I will actually grab some of these great quality stocks. Some of the
basic method I use to know whether the companies are cheap or not is seeing its
Price to Earnings ratio (P/E Ratio). This is a measure concept of seeing its
current price relative to its per-share earnings. Depending on what kind of
business, I prefer companies that have a P/E below 15. Another valuation metric
I use is seeing its Price to Book ratio (P/B Ratio). A lower P/B ratio means
the more undervalue the company is. Of course, you cannot just use this metric
to see if a company is undervalued. There are many other important financial
metrics need to be considered before investing.

Buying More
SharesYes! The other reason of buying shares in a bear market is that you are
able to purchase more shares. Instead of buying at $20, you are able to buy it
at $15 or lower, depending on the market volatility. I mean why buy the same
product for more expensive price when you can get it for cheaper. A great
example is when you are in a super market where the cost of an apple used to
sell at $1, but since the economy is bad, they are willing to sell to the
consumer at $0.80 per apple. That’s a 20% discount and it can be a huge
advantage for people who want to accumulate dividend growth stock at cheap
price.

While even though the value of dividend paying stocks will most likely decline
during a bear market, the company behind the stock should still continue paying dividends. Just like owning a
rental property allows the owner to collect regular rental payments, owning a
dividend paying stock allows the owner to collect regular dividend payments.Of course you
have to make sure the company you invest in maintain the dividend payments and you
have to make sure that you know what you are doing by looking at the company's financials statements. Trust me, do your homework diligently! You can’t blame anyone except yourself when you lose money.

The Awesome
Part of Investing in Dividend Growth Companies in the Bear Market
I’m going to show you an illustration on how you can make money even in the
Bear Market. Let’s say you purchase 500
shares of a $20 stock that pays a
dividend of 5% and its dividends
increase by 10% annually. The stock
matches the S&P 500 historical average price return of 7.50%. If you reinvest the dividends after ten years, your 500
shares would grow to 842 shares at a
price of $41.22 for a total value of
$34,726.53.

Now let’s take a look at it at a different perspective. Let’s say that we
encounter a Bear Market, let’s assume that the market was down for 10
years at 3% annually (Shit Happens!).
It doesn’t sound like much but it’s pretty devastating to see your portfolio
lost 26% of its value. However, if
you have reinvested your money even during the bad times, you won’t have
suffered a 26% lost. On the contrary, your $10,000 investment is now worth $18,245.38 if you have reinvested your
dividends. You still make about 82.45%
over a 10 year period time or on average of 6.20% compound annual growth rate (still better than leaving your
money in the CD account). While the rest of the others are affected by the
lost, your investment is generating nearly $3208.72
in dividend income every year which is a 17.59% yield on cost.

Because the price of your stock was declining while you were still
getting paid by rising dividend, you now own shares which is over 395 more shares than if the market had
gone up 7.50%. Pretty Awesome right!?

Let’s Take
This Illustration Further
You are going to be amaze with the performance result even though the market is
declining year after year by purchasing stocks and reinvesting the dividends
(especially when the dividend is growing). I will show you a graph below on how
it works. I will pick a sample after year 10 as I just described earlier, where
you have shares and the current price is $14.75.

Pretty amazing when you look at the numbers. After 20 years of stock
decline that sent your stock price from $20 to $10.88, your $10,000 investment
is now worth $233,350.79. Yes I’m super serious! That’s an average compound
annual growth rate of 17.06% even when your stock was declining in value of 3%
annually.

After all, some of you guys might debate that this is just a theory, and
there’s no way a company can keep continuing to raise their dividends at 10%
annually during a recession. However there is data that can counter that
argument. According to Robert Allan Schwartz, who studied the dividend growth
rates of 139 Dividend Champions during the great recession, states that 63% of
the companies continued to raise their dividends in each year from 2008 to
2010.

I hope from my research we can conclude that investing for the long
term, reinvesting dividends is a great way to protect and grow your portfolio
during market downturns. In fact, I want my dividend growth stocks to fall as I
will be reinvesting the dividends to acquire more shares at a cheaper price. It
will take a strong mind set controlling your emotion seeing your portfolio go
down in value. That’s why I highly recommend you readers to really do your
research and gain more financial knowledge so that you can withstand
psychologically. If you can do all this right, you will see the great result
10, 20, or 30 years from now.

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About Me

Hi, my name is Hansen. I was born in the year of 1990 which makes me 27 years old. I'm currently employed in a Home Appliance Manufacturing Company while managing my blog & dividend growth portfolio. Furthermore, I recently just started my online e-commerce store called "Buntronic", which focus in selling electronic accessories products targeting online consumer. For my education background, I graduated with a Finance Degree from San Francisco State University where I learned to analyze and invest in companies. I apply Benjamin Graham's value investing principles when investing as this method have been used by many worldwide successful investors such as Warren E. Buffet. This blog documents my personal progress and strategies toward my financial freedom. Check out my "About Me" page for more detailed information about my history.

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I am not an investment professional or a licensed financial advisor. I am a self-educated investor and the contents of this blog reflect my personal investing strategy, thoughts, and decisions, which may not be appropriate for other investors. My investing decisions do not constitute recommendations or advice. You should consult with an investment professional before making any investing decisions. I am not responsible or liable for any of your investing decisions or the outcomes of your decisions, including but not limited to those that may result in monetary loss or emotional distress. I am not responsible for any of the comments posted by readers or the contents of any linked websites. This blog is for educational purposes only.